How to File Bankruptcy and Keep Your Car

When considering bankruptcy, many people are concerned with whether they will be able to keep their car. No two bankruptcies are the same and whether a debtor will be allowed to keep his or her car depends on a number of factors. 

Exemption Amount and Value of the Vehicle

State law governs the amount of the exemption available to a debtor for a car. The amount of the available exemption can be quite different from jurisdiction to jurisdiction. 

If the value of the vehicle exceeds the amount of the exemption, the trustee may choose to seize the car, sell it, and distribute the net proceeds to the debtor’s unsecured creditors. This decision, however, depends on how much equity will remain after paying the debtor the value of the claimed exemption. If little money will remain after paying the exemption and the costs of the sale, it’s quite likely that the trustee will abandon his interest in the vehicle and the debtor will be allowed to keep it. 

Redemption vs. Reaffirmation in Chapter 7 Cases

In a Chapter 7 case, a debtor has the option to redeem or reaffirm an auto loan. If a debtor chooses to redeem an auto loan, he will be required to pay to the finance company a sum equal to the present value of the car. This is particularly helpful to a debtor who owes more on his car than it is worth. The redemption payment usually must be made in a lump sum. 

If a debtor chooses to reaffirm an auto loan, he will be required to sign a reaffirmation agreement. The reaffirmation agreement is a promise to pay the debt pursuant to the original loan terms or pursuant to modified loan terms as set forth in the agreement. If a debtor reaffirms an auto loan, that debt will not be discharged.  

Auto Loans and Chapter 13 Cases

In a Chapter 13 case, the debtor’s Chapter 13 plan must provide for payment of all auto loans. If a Chapter 13 debtor owes more on a vehicle than its worth, he will be allowed to strip off (eliminate) the unsecured portion of the debt as long as certain conditions are met. 

Getting Legal Help

The treatment of auto loans under the Bankruptcy Code is very complex.  Because they don’t understand the law, many debtors who represent themselves make potentially disastrous mistakes that often result in the loss of a car, home, or other property. Hiring an experienced bankruptcy attorney is the best way to protect your property and obtain the fresh start you deserve.